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Welcome to the bizarre world of banking regulation. Despite the recent disaster wrought by affirmative action lending, Washington ratchets up still more politically correct requirements and shifts the measure of discrimination towards “disparate impact.” Even unbiased behaviors are subject to penalty unless they benefit protected classes.

Washington Mutual was only permitted to consummate a merger in 1999 after committing $120 billion (over ten years) to poor and minority borrowers. And get this: throw two percent of earnings to radicals like ACORN. WaMu subsequently suffocated under toxic debt securities.

While debased dollars and manipulated interest rates spurring mal-investment were the primary catalysts, politically charged housing quotas doused the flames of financial distress with an accelerant. It was as certain as gravity that groups heavily represented as subprime borrowers would also disproportionately stiff lenders.

As the crisis unfolded, the initial outcry blasted banks for evicting helpless homeowners. The only people losing property were those who hadn’t honored their mortgages. When borrowers put little down and don’t pay their debts it’s curious they “lost” something, leastwise “their” homes, but political correctness necessitates blaming banks.

Mounting defaults began toppling banks at taxpayer expense. Even those of us who despised TARP must concede most banks repaid Treasury at a profit. However, as my editor John Tamny surmises, by accepting bailouts, banks surrendered their moral footing to fend off excessive LIBOR-gate fines or resist Washington’s social engineering schemes.

Rather than redress the principle causes of the financial crisis: reckless monetary policy and subsidized mortgage risk, particularly the GSEs; Dodd-Frank cements systemic risk with Too-Big-To-Fail. Rather than ensure stability, it prescribes the Consumer Financial Protection Bureau and increased affirmative action instead.

Promulgating rules more emblematic of Washington’s political calculus than financial prudence, the legislation establishes twenty Offices of Minority and Women Inclusion across the alphabet soup of regulatory agencies. The Fed, SEC, OCC, FDIC and others will review not only financial viability, but diversity too.

Congresswoman Maxine Waters (D, CA), who longs to tax “gangsta” banks out of business, inserted this in Section 342; yet exempted minority-owned banks. These stipulations pertain to employment, but banks must also enlist more minority vendors. The regulators themselves shall no longer contract the lowest bidders or best performers, but to “the maximum extent possible” amplify diversity.